The transposition of EU legislation allowed Poland to profoundly reform the way in which its
economy is regulated. Changes in such areas as financial markets, company law, accounting,and intellectual property rights have created better environment for business and have led toeconomic growth. The adoption of the European state aid regulations imposed restrictions on
government intervention into the enterprise sector, while changes in competition law
strengthened anti-monopolistic policies and the protection of consumers against the unfair
behavior of producers.
In light of this, another important observation should be pointed out. Clearly, the gradualintegration with other European countries has not been the only factor influencing thedevelopments in the Polish economy. Governments of the member countries enjoy a large
degree of freedom in planning and implementing domestic economic policies regulating theirdomestic business environments. Thus, when examining the economic developments, theimpact of conventional economic factors should be taken into account as well. Finally, it
should be mentioned that while the short-term shocks caused by the 2004 accession werealready analyzed, the long term impact of EU membership can only be studied after several
years.
a) Economic Growth
In the first two years of EU membership (2004-2005), Poland has enjoyed sound economic
growth at an average rate of 4.2% a year (for yearly rates see Table 1 below). This positive
trend continues to be observed in 200620. At such a rate, Poland ranks high (no. 8, together
with Greece and Luxembourg) in the EU-25 rankings. Poland’s economic growth has been
twice as high as the growth of the old Member States when taken as a whole, as the averagefor the EU-15 was only 2%. However the Baltic countries and Slovakia, who lead the ranking,have been doing far better than Poland 21 . In recent years, all four have implemented
substantial public finance, tax and regulatory reforms which have positively impacted on
business activity and private sector growth, and this has sped up the rate of economic growth.
Table 1 GDP, Exports and Imports of Poland in 1997-2005, growth rates (%)

Source: (Poland’s) Central Statistical Office data
The average rate of GDP growth in Poland in the nine year period of 1997-2005 was 3.9%
yearly, the same as for the EU-10 as a whole. Since economic growth in the old Member
States was considerably lower (2.3% yearly), a real convergence was in progress. In 1997,
Poland’s GDP per capita (in PPS) accounted for 40.1% of the EU-15, and nine years later for
46%. However the distance to the average for the EU-15 remains large. Poland is also
lagging behind the majority of the NMS. Only Lithuania is still behind Poland (with 43.1%).
20

In the second quarter 2006 GDP grew 5.5% YoY and CASE forecast for the entire 2006 is 5.3% (CASE,
2006).
21
Latvia 9.1%, Estonia 8.6%, Lithuania 7.2%, and Slovakia 5.8%.

In 2005, the average GDP per capita for the newly acceded countries was 52.1% of the EU15 (European Commission, 2006a).
The research results show that capital accumulation and technical progress were the key
factors contributing to the economic growth of Poland (and other NMS) in the last eight years(1998-2005). Labor has had a negative impact in Poland (and a number of other NMS)(European Commission, 2006a).

b) Migrations
According to neo-classical economic theory (see Hicks, 1932) migration is perceived as aconsequence of wage differentials and as a means to even out inequalities in wages and living
conditions.
Labor migration from Poland to Western countries started in the early 1990s, soon after thetransition to a market economy had been initiated.
The temporary nature of residence in the host countries has been the main feature of migrationfrom the EU-8 in the whole transition period (World Bank, 2006a and 2006b). The largest
flow of labor migrants from transition countries was generated by a seasonal demand for laborin agriculture and construction, mainly in Germany, but also in Spain, France and the UK.
These flows were usually regulated by bilateral governmental agreements. Labor flows havealso flourished under the 3-month tourist visa-free regime. Some peripherally-located microregions of Poland became very dependent on the labor markets of big European cities(Brussels, Berlin, Vienna, and London). One third to one half of households live on incomes
earned in these cities (Ja wi ska and Okólski, 2001).
It is difficult to say how many Poles worked in the EU-15 in the pre-accession period, as
official statistics are unable to grasp the phenomenon for a number of reasons. However it iscertain that much of the migration was illegal, therefore any figures on labor migration
underestimate the real scope of labor flows. The German statistics on legal seasonal workers
shows that while in 1993 there were 143,861 Polish nationals working in Germany, in 2003
this number increased to 271,907 (World Bank, 2006a).
As forecasted, the external mobility of the CEE countries’ labor force intensified after theirEU’ accession 22 , and as predicted, inflows were concentrated to the three countries that
opened their labor markets. Poland has had an important contribution to this due to the size of
its labor force. In 2004, approximately 250,000 Poles stayed abroad for at least two months.
This is 20% more people than in 2003. Approximately 80% of migrants work during theirstay abroad. The UK and Ireland have become important destinations for labor migrants23;
however Germany remains the dominant one (25% in 2005) (World Bank, 2006a).
The age structure of the Polish migrants has changed over time. While in 2000 those aged
below 35 constituted 51% of the migrants, in 2004 their share increase to 61%. In the same
22

However some of the employment registered in these three states soon after the enlargement was not a resultof a new inflow of migrants but rather the legalization of workers from new member states who were alreadyworking in old member states.
23
The UK had a 20% share in 2005 as compared to 4% in 2000. Ireland was meaningless as a destination for the
Polish labor in 2000 while its share in the total outflow in 2005 was 6%.

Polish farmers were afraid that after the accession, the Polish market would be flooded with
imported food. This did not prove correct. On the contrary, the liberalization of trade infoodstuffs generated an increase in the Polish exports to the EU.

Figure 1 Polish Exports and Imports and Balance of Trade in 1994 -2005

Source: NBP data
The rapid growth of exports in recent years despite the low import demand from major
markets may be explained to some extent by the growing presence of FDI in Poland. Foreignowned companies established in Poland account for a major part of Polish exports.
d) Foreign Direct Investments (FDI)
FDI plays a crucial role in the process of a country’s economic modernization. In the case of
post-communist Poland and other CEE Countries, which were transforming their economic
systems and restructuring their economies in the 1990s, there was a great need for foreign
direct capital. FDI complemented the limited domestic sources of funding and created thepotential for increases in production increases and the creation of employment. FDI inflows
also contributed to productivity growth through the transfer of technology and expertise.
Additionally, FDI inflows had positive indirect effects (spillovers) as the presence of foreign
direct multinationals improved the productivity of domestically-owned firms via technology
transfers and enhanced competition.
At the beginning of the transition period, the FDI inflows to Poland were very low, forobvious reasons. They began to slowly increase in the mid-1990s when the market institutions
were already in place. FDI received an additional impetus after 1997 parliamentary elections,when a new, pro-reform government undertook the program of privatization of big stateowned enterprises. The peak of the privatization deals occurred in 2000 and this contributed
to the record amount of foreign capital inflow (EUR 10.3 billion), which holds until thepresent day (see Figure 2 below). The change of government in the year 2000, together withthe parliamentary elections of 2001, which brought into power two socialist parties, led to a
substantial slow-down of the privatization process. The 1999 sale of a large portion of theshares of PZU, the largest Polish insurance company, to a foreign investor was formally
Figure 2 Foreign Direct Investment and Foreign Portfolio Investment in Poland,
1997-2005

Source: NBP data
questioned by the new government and the privatization contract was breached. The foreign
investor (EUREKO) sues the government of Poland. These developments negatively affected
the volume of FDI, which in the years 2002-2003 dropped to less than half of the 2000 peaklevel. Also, since 2002, foreign direct capital inflows have mostly been green-field
investments and, increasingly, takeovers of domestic-owned private companies or mergers
A considerable increase in the foreign direct investments to Poland was expected after the EU
accession. These forecasts proved true as there was a spectacular increase in FDI inflows in
the year of the accession: 2.5 times more than the previous year. Altogether EUR 10.29
billion was invested in 2004, nearly reaching the peak-levels of 2000. However, in 2005 FDI
inflows went down by 22% to EUR 7.7 billion.
Until now, Poland has been the main recipient of FDI out of the EU-10, and understandably
so when one takes into account the size of the Polish economy. By the end of 2005, the FDI
stock accounted for EUR 75.7 billion. In relative terms, the cumulative foreign investments in
Poland were modest and amounted to only 31% of GDP, which placed Poland close to theend of the rankings (only Slovenia and Romania trailed behind).
The ongoing process of economic integration with the EU is occurring not only in trade but
also in capital mobility. The EU-15 was the major investor in Poland for the entire periodprior to accession and has also dominated in the two years since the formal accession. In 2004
and 2005, the old Member States respectively accounted for 85.5% and 82% of the capital
inflow in these two years (NBP, 2006b). As of 31 December 2005, the EU-15 FDI amounted

to EUR 63.1 billion and constituted 83.3% of the total FDI (EUR 75.7 billion). Foreign
investments originated mostly from The Netherlands (EUR 16.4 billion), Germany (EUR 12.3
billion) and France (EUR 9.6 billion) (see Figure 3). These three countries accounted for
60.8% of the cumulative FDI inflow to Poland.

Figure 3 Foreign Direct Investments as of 31 December
2005 by Countries (%)

US
7%

Japan
1%

Other
7%

Germany
16%

New Member
States2%
The Netherlands
22%
Other EU-15
32%

France13%

The United States, which previously made substantial investments in Poland, in 2005 invested
only EUR 626 million, which accounted for 8% of the total current foreign direct capital
inflow. The cumulative US direct investment to Poland as of the end of December 2005
amounted to EUR 5.6 billion. With a share of 7.4%, the US ranked 4th after the three EU
Member Countries listed above (Figure 3). Japan with EUR 238 million accounted for 3.1%of 2005 FDI in Poland (NBP, 2006b). Japan’s direct investments in Poland as of December
2005 accounted for only EUR 606.6 million.
Lastly, it is worth noting that although they are still small, capital flows to Poland from the
New Member States are increasing.
As far as the sectoral structure of the FDI stock in Poland is concerned, investments areconcentrated in three sectors: manufacturing with 37% of the total foreign investment ranks
1st, financial intermediation 2nd (20%), and trade 3rd (18%) (NBP, 2006b). In the
manufacturing sector, the most attractive destinations for foreign capital were (1) motor
vehicles manufacturing (EUR 4.7 million, 6.2%), and (2) food production (EUR 4.5 million,
6% of the total).
Interestingly, the Polish FDI, which for many years was very small and did not exceed EUR
100 millions a year, has increased spectacularly in the recent two years. The outflow of FDI
amounted to EUR 636 million in 2004 (which was 2.3 times more than a year earlier) and
EUR 2,493 million in 2005. The last figure includes the purchase of the Czech Unipetrol by
ORLEN, which accounted for 18% of the total direct investment outflow.

A visible impact of Poland’s EU membership is the increased foreign portfolio investment in
Poland (see Figure 2 above). Though it was already growing in the two years before theaccession, in 2004, it increased by 2.5 times (to EUR 8.5 billion), and in 2005 by 39% (toEUR 11.8 billion), and surpassed the 2005 FDI inflow by 54%.
To receive more FDI in the future, Poland needs to substantially improve not only political,
but also its business environment, so as to become more attractive to foreign investors. Poland
needs to stand out when competing with other investment destinations, which have mademany improvements in regulation, tax systems etc.27 However, the prospects for improvement
are rather modest. The Law and Justice party (PiS), (which formally refers to itself as rightwing, but which is in fact populist), won parliamentary elections in September 2005 andcurrently runs a state-interventionist fiscal policy. The recently initiated restructuring andprivatization processes of "sensitive sectors" (coal, steel, railroads, and energy) has stalled. In
addition, with the help of some mass media organizations, the leaders of the three coalition
parties in power have revived anti privatization and anti-foreign capital sentiments (under theslogan of the so-called “loss of national ownership”). Nevertheless, many local governments
are very pro- foreign investor-oriented and work hard to attract the investments of big
multinationals, and have been very successful.

e) The EU funds for Poland in 2004 - 2006
Poland accounted for 3.1% of the EU budgetary expenditures in 2004, while it contributed
1.4% to the EU budgetary revenues. With 1.7% of net transfers, Poland was a net beneficiaryin the EU budget. The amount of net transfers was EUR 1.7 billion and this accounted for
0.75% of the country’s gross national income (GNI) (European Commission, 2006a). The
supply of EU funds to Poland was expected to increase considerably in the next few years,
and was estimated that it would reach 1.2% of GDP in 2006, 1.5% in 2007 and 3,25% in2008 (European Economy, 2005 and 2006).
Recent Polish data about transfers shows that in the first 24 months of EU membership (May2004 –April 2006), Poland received a total of EUR 7.5 billion from the EU budget payments ,while its contribution to the EU budget amounted to EUR 4.6 billion. The net transfer was
positive and totaled EUR 2.8 billion (Government of Poland, 2006).
As Figure 4 below shows, over one quarter of payments (28.4%) came from pre-accession aid(Phare, ISPA and SAPARD programs), which will cease by the end of 200628. With regard to
the new financial instruments available to Poland since the accession (see Section 1 above),funds for agriculture and rural development accounted for the biggest share of transfers(26.9%). Transfers for structural actions (23.1%) ranked second.

27

Poland ranks only 43rd in the country ranking by potential to host FDI (UNCTAD, 2005).
According to the principle of n + 2, EU budget funds committed in the year n may be used only within the twoyears after year n. Unused funds are lost to the beneficiary and remain in the EU budget. This principle wasintroduced in the EU in 2000 in order to discipline recipient countries.
28

Figure 4 Structure of the EU Transfers to Poland,
1 May 2004 – 30 April 2006 (%)
Internal Policy(Schengeninstrument)
Liquidity Fund
3%
17%

Other transfers
2%
Phare
12%

Other CAP
transfers
0%

Sapard
7%

ISPA
10%

Direct Aid
12%
Rural
Development
12%

Marketinterventions
(CAP)
3%

Structural Funds
22%

Source: Government of Poland, 2006.
Leaving CAP instruments aside, the use of other European Union budget funds requires priorprogramming for spending. The National Development Plan (NDP) for the years 2004-2006
was elaborated by the Polish government in an extensive process of consultations with local
governments and social partners. This is a strategic document which elaborates plans for the
medium term. It is the first such document since the transition process started which collects
all the government’s interventions at the country level: horizontal and into regions and sectors.
The NDP includes five so-called setoral programs29 and a program for regional development.
These programs list goals and activities which may be supported from EU funds. They also
give would-be recipients of the grants a framework in which they have adjusted theirapplications.
For the three year period, 2004-2006, a ceiling of EUR 12.8 billion was established for funds
from the European resources to be used for the realization of NDP programs. Of this amount,
EUR 8.6 billion was committed from the structural funds and EUR 4.2 billion from thecohesion fund.
The absorption of these resources was slow in 2004 and 2005. By the end of October 2005 allapplications were collected and reviewed: the correctly prepared applications as a wholeasked for 151.5% of the total Polish allocation, which indicates the high level of demand forsuch programs (and EU funding). However, contracts with successful beneficiaries weresigned for only 50.7% of the allocation. Up to November 2005, 4.35% of the total allocation
was used, i.e. beneficiaries of the programs received the payment for costs borne thus far( uber, 2005).
29

These are: (1) Sectoral program for Increasing Competitiveness of Enterprises; (2) Program for Developmentof Human Capital; (3) Program for Restructuring and Modernization of the Agricultural Sector and Developmentof Rural Areas; (4) Sectoral Program for Fisheries and Fish Processing; (5) Sectoral Program for Transport.

A number of factors are to blame for the slow absorption of the structural funds ( uber,2005). The first one is that Poland has adopted a decentralized system of managing thestructural programs. This prolongs the procedures, and requires more coordination. The
second factor is the poor quality of the laws adopted in Poland that apply to the distribution
and use of the structural funds. The third factor is the meager size of public funds fordevelopment projects (transport etc), which are necessary in order to co-financeinfrastructural investments. The next reason is the poor quality of the system of publicfinances, which has not been reformed so far30. Last but not least is the poor state of public
administration, while well-qualified bureaucrats are crucial for the proper management of the
programs. Public administration was not strengthened in time to be ready to manage andprocess the flood of project proposals that followed the announcement of the programs
elaborated by the Polish government and accepted by the European Commission for funding.
In the course of 2006, the situation improved: domestic regulation concerning the use of the
EU funds has been somewhat relaxed and the administrative capacity has increased.

f) The public attitude towards integration
Since the accession, public support for Poland’s EU membership has been constantly
increasing.
In May 2004 supporters accounted for 71% of the adult population andopponents for 20%. By August 2006 the number of proponents increased by 11 percentage
points to 83%, while the number of opponents was halved and shrank to 10% (CBOS, 2006b).
Only 7% had no opinion with regard to this matter. Supporters of Poland’s membership to the
EU dominated in all socio-demographic groups. The largest share of opponents was in thegroup of people with only primary education completed, yet they were not many of them(every sixth adult opposes integration). It is worth noticing that the massive support for
integration was a characteristic for all the electorates of the main political parties, including
those which, on the eve of Poland’s accession, were openly against the membership. This
result has been taken seriously into consideration by the anti-European politicians.
The results of the public polls also indicate that the supporters of Poland’s membershipevaluate the impact of the accession much more positively than the opponents, a majority ofwhom see more costs than benefits of EU integration (CBOS, 2006a).
The number of people who positively assess the impact EU membership on Poland has been
growing consistently over time. Two years after the integration, 54% of respondents believedthat EU membership brought more benefits than costs for the country. This is 15 percentage
points more than was indicated in polls taken after the first three months of the accession(August 2004) and 8 percentage points more than after the first year (April 2006) (see CBOS,
2006a). The number of those who have an opposing opinion is three times less (18%), and 12
percentage points less than shortly after the accession31.
When asked about personal gains stemming from the country’s membership in the EU, 36%
declared that they benefited from the integration. 16% were of the opposite opinion and30

For example, currently the financial perspective is limited to one year, while in structural projects, a longer
perspective is crucial.
31
18% of respondents believed that benefits and costs will be equal, while the remaining 10% responded“difficult to say”.

EUIJ Workshop“EU Enlargement and Its Economic Impacts on Transitional Countries”
From plan to market economy
In Central and Eastern Europe the revolutionary changes which occurred in 1989 and in1990 were followed by a powerful economic crisis, compared by some annalists with theGreat Recession of the ’30, or with the damage created by WWII. The intensity andduration of each crisis varied from a country to another, being more accentuated ineastern countries (some of them recorded negative economic growth with two digits). For
the majority of countries, the crisis lasted until 1994. Starting with this year, until the endof the 90s, all candidate countries registered positive economic growth rates (with the
exception of 1997 and 1998 when the effects of crisis from Asia and Russia were felt).
The 2000 year represented the beginning of the accelerated development both for theCentral and Eastern European countries (CEE) and for Romania.
Among the other Central and Eastern European (CEE) candidate countries, Romania was
the last to receive the status of a functioning market economy. Only in October 2004, in
the European Commission’s report, it concluded that Romania complies with thisCopenhagen criterion. Although it’s beyond the scope of this paper to analyze the causesof this delay, we have to mention that Romania inherited one of the worst starting
conditions for implementing the transition to a market economy 5 . As Alain Smith(Phinnemore (coord), 2006:29) concludes, “in 1989, the Romanian economy was on theverge of collapse, with widespread shortages and severe rationing of energy, while thepopulation had endured nearly a decade of deep austerity and capital stock had become
increasingly obsolete”.
However, the slow pace of the transition to a market economy might be both attributed tothe difficult situation Romania had in 1989 but also to the inefficiency of governments
during the first 10 years of the transition period. Over the latest 16 years, Romania has
experienced a rather unstable macroeconomic period, with episode of recession (19901992, 1997-1999), recovery (1993-1996) and recovery/growth (2000-2006). Most of theimpetus for reform came from external pressures, such us International Monetary Fund6,
World Bank and last, but not least, European Union.
However, since 2000 Romania has entered a phase of high growth and disinflation. Thus,
during 2000-2005, Romania’s GDP grew by an annual average of above 5% [in the firstquarter of 2006, real GDP rose by 6.9%] and inflation came down to 9.3% in 2004 fromover 40% in 2000. The privatization process has accelerated since 2003-2004 as a resultof the increasing number of direct sales of enterprises and financial institutions7, mainly
5

Between 1967 and 1980, the Ceausescu government had borrowed important amount of money fromwestern banks or international institutions (IMF) to finance a forced industrialization of the country(through investment in engineering industries, refineries, petrochemical plants, infrastructure projects such
us Danube – Black Sean canal or construction of House of People in Bucharest) while the population andthe production of consumer goods had been completely neglected. A financial crisis in 1981, which
necessitated the rescheduling of the Romanian debt, determined Ceausescu to move on a policy of rapid
debt repayment which was achieved by draconic cuts of imports (energy, consumer goods, and equipment)
and forcing of exports.
6Over the period, Romania signed six standby agreements with IMF which stipulated macroeconomic
targts and structural reforms but only one successfully completed in 2003
7
One of the largest privatisations in Romania’s history were the sale of the majority share in the integrated
oil company Petrom and of the Romanian Commercial Bank.

EUIJ Workshop“EU Enlargement and Its Economic Impacts on Transitional Countries”
to foreign investors. Currently, the private sector produces more than 70% of the GDP.
Major news of the 2005 was the fiscal policy reform and the adoption of a flat tax rate of
16%, aimed at boosting FDI and making the economy more transparent.

At the moment, Romanian’s economy reveals both strong and weak points. On the one
hand, from structural perspective, one should notice the steady expansion of the private
sector, which contributes to the GDP formation with more than 70% and employs morethan 70% of active population. Moreover, we have also to observe a significant rise inforeign trade and investment and an increased integration into EU markets (trade with the
EU represents around 70% of overall trade). The openness of the economy has also been
noticed if we take into account the capital account liberalization, which is almost
completed (access of non-residents to bank accounts was allowed in April 2005)8.
On the other hand, a number of serious weaknesses persist in Romanian economy andmight harm macroeconomic conditions and GDP growth over longer term, such us:
The slow pace in increasing the administrative capacity of using European funds,
an issue close related with the specific budgetary aspects9;8

It must be said that the capital account liberalization represented a conditions for the EU accession during
the negotiation process and relates to direct inflation targeting as a new monetary policy regime. Inflation
targeting as a new monetary policy regime was officially adopted by National Bank of Romania in August
2005 and reflects the NBR’s intention to improve its operational independence and focus more effectively
on reducing inflation.
9
In the last years, the budget revenues were below 30% of GDP while financing needs are increasing.
According to Daianu (2006) because of unavoidable financial obligations (EU budget contribution or cofinancing of EU funds), Romania would face a budget “shock” at the moment of accession. Consequently,
the budget deficit could raise above 3% of GDP which worse the situation of public finance.